Last week was not a good week for US equities, to say the least. Tuesday saw the first intraday decline of more than 1% since the beginning of the year.

After a record breaking period of low volatility and market complacency, investors were rapidly caught off guard when the major benchmark indices in the US sharply sold off by more than 1% Tuesday morning on fears that the new health-care bill might fail to pass The House of Representatives.

The possibility of a failed vote “adds to concerns that Trump lacks enough house support (even among Republicans) and that he may struggle to get approval for all the stimulus policies he pledged,” analysts at Accendo Markets told clients in a note this week. This means tax-cuts and financial regulation reform could take longer than expected, and high hopes for these changes indubitably contributed to the market rally since Trump’s victory.

Equities were mixed the remainder of the week and, again, suffered sharp sell-off attempts on Thursday as news broke that the healthcare vote would be delayed until Friday. On Friday, GOP leaders shocked investors as they pulled the bill in the final few minutes of equity index trading.

This time, however, the breaking news from the GOP of the pulled bill led to a recovery of Friday’s losses.

Presumably, from a political standpoint, a pulled healthcare deal was better than a failed healthcare deal, and this logic was the impetus behind the last-minute decision. Regardless, it helped investors as equities recouped their intraday losses of 0.50% when the Associated Press reported the decision.

Looking overseas, the US health-care vote and its corresponding volatility had a surprising impact on Europe and Asia where stocks mostly declined, led by financial and energy shares.

London’s FTSE 100 logged its worst week since January, declining more than 1.1% for the week.

Whenever sharp down moves occur in the stock market and volatility increases, investors usually flock to the haven of precious metals. This is precisely what happened last week as gold had its best gain since Brexit.

Gold for April delivery gained more than 4% in six days as the reality of partisan politics finally hit investors. “Trump has so far failed to follow up on any of his grand announcements,” said analysts from Commerzbank AG.

Although gold stumbled in the last 30 minutes of trading on Friday after news broke that the healthcare bill was pulled and stocks rallied, gold is showing a lot of strength and continuing to hang around the $1250 level.

The failed health-care vote was the first real test since the beginning of the year of the robustness of lofty equity valuations versus the fundamental demand of gold, and by the looks of it, the battle is just beginning.

Amid continued outperformance, everyone is asking the same question: Can stocks go higher? Many believe they can, in fact, continue their ascent. The problem? This growth is widely thought to come from investor euphoria rather than sound, long-term fundamentals. “The market’s not really worth more, but exuberant buyers will chase shares higher anyway,” theorizes The Wall Street Journal.

However, many are happy to accept any explanation because, after all, growth is welcome whether it comes from the balance sheet or the psyche. However, growth emerging from investor psychology is tenuous. Gold is different. There are no earning calls or strategic press releases. The value is intrinsic. Shares emerge from boardrooms, but gold emerges from the Earth. This difference is critical to understanding why gold enjoys a degree of freedom from the psychological underpinnings of the stock market.

“You’re not making it as an investor,” remarks the founder of Yardeni Research. “You’re making it as a speculator,” he warns. Valuations continue to perplex experts struggling to reconcile outsized stock prices with the voracious appetite of investors. One theory: investors are wholeheartedly buying into some of the recent positive notes on the economy. Examples include data from the University of Michigan citing year-over-year increases in the Index of Consumer Sentiment, and the Index of Consumer Expectations. These are positive numbers to be sure but are the rooted in any inherent value within the economy or stock market, perhaps not.

Shares of publicly traded companies are based in confidence much like the dollars used to purchase them. This trust is waning. Over the last century gold has proven more valuable than all the key currencies. The primary reason for this trend “is that the available supply of gold changes little over time – growing only 2% per year through mine production,” according to the World Gold Council. Conversely, fiat currencies are merely printed. Bonds face a similar problem; they can just be issued at will and are backed only by faith in the underwriting institution. Moreover, rising interest rates undermine the efforts of those turning to bonds as a means of mitigating risk. Combine these factors with a slowing rate of productivity within the U.S., and you have elevated risk in portfolios traditionally considered diversified.

Gold enjoys more practical uses than paper. The metal serves a critical application in electronics, medicine, and aerospace. This ‘real world’ characteristic of the asset is becoming more important as wealth in equities continues to mount atop a loose structure of great expectations.

The fact remains: equities are an invention of man and man is beset by cognitive biases giving way to irrationality. One such bias, herd behavior, tells us how today’s investors are succumbing to impracticality. Herd behavior is characterized by individuals making choices designed to mimic the crowd despite the fact that if they were to act independently, they might choose another option. There are reasons to believe such a phenomenon is unfolding in the market today. Could this same bias drive gold up? Yes, gold can also rise and fall at the whims of our psychological flaws. However, when it comes to gold, these changes don’t alter the fundamental truth that it is a finite resource. As a result the value linked to it will always be more firmly fixed to reality.

Since first coined in Asia Minor in 600 B.C. gold has been accepted as currency around the world. Today, the global supply could fit in a cube less than 70 feet wide, small enough to fit in a baseball infield. Perhaps the best reason to own the metal is the fact that we cannot change the total of its availability.       

If Wall Street analysts were weather forecasters, the extended outlook for gold would be Sunny, and No Chance of Rain.

Gold prices surged to a higher weekly close on Friday, despite last week’s Federal Reserve interest rate increase.  Rising inflation, uncertainty over the stability of the European Union, and geopolitical worries support continued gold buying by both professional money managers and individual investors.

On Friday, spot gold traded up to the $1,230 an ounce area, well above the $1,127 area seen in mid-December.

Looking Ahead

Both Wall Street and Main street players expect the gold market to rally this week, according to the latest Kitco Survey.

Wall Street: 61% analysts surveyed believe gold will continue to rally this week   

Main Street: 69% of individual investors surveyed expect gold to continue to gain

How high? In early March, a new BofA Merrill Lynch Global research report outlined the positive backdrop for gold and highlighted a $1,400 per ounce year-end target for the yellow metal.

While gold is benefiting from many avenues right now, concerns about geopolitical tensions are one factor. Let’s take a deeper dive.

President Trump Chooses a Big Stick

Diplomats often talk about choosing between a “carrot” or “stick” policy when it comes to resolving global disputes.

Last week, President Trump unveiled the Administration’s budget proposal for 2018, which made his preference clear for a big stick policy.

The budget proposal offers investors specific clues on the new policy direction. The budget proposal slashes funding to 19 government agencies and directs the funding to massive new military spending – totaling an extra $54 billion to defense spending, along with $4 billion to fund the border wall with Mexico. Meanwhile, the State Department, which offers the “carrot” or diplomatic approach to geopolitical conflict is facing a proposed 28 percent budget cut in the proposal.

This opens the door to a massive military build-up and new missiles, tanks, submarines, shifts and aircrafts. Aerospace and defense sector stocks have been rallying hard in anticipation of the renewed focus on building military might.

Gold is the ultimate safe-haven investment and typically surges higher during times of geopolitical stress, terrorism, military action and war.

Numerous Trigger Points

There are plenty of hot spots around the globe, including: Russia (annexation of Crimea), the dispute over claims to South China Sea, the North Korean nuclear program, Iran’s recent missile test.  

Other concerns include the potential for a massive cyber-security attack or data fraud and theft on a large scale and the uncertainty over what the rising populist moving in Europe could mean for the European Union.

There are a number of potential trigger points for conflict at any time. The Trump Administration is focused on increasing military might. Gold is poised to benefit from the escalation of conflict or tensions in numerous hot spots around the world.

Wall Street analysts expect gold to continue rallying. Current price levels around the $1,230 an ounce level could be the best buying opportunity that investors see all year. Use the relatively low levels in gold now to add protection to your portfolio.

Gold prices shot higher in the minutes following the Federal Reserve’s announcement to hike interest rates on Wednesday. Top Fed officials have been telegraphing expectations of this week’s 25 basis point interest rate hike for days now. Today’s action nudged the benchmark federal funds rate to a still ultra-low 0.75-1.00% range.

In a classic “sell the rumor, buy the fact” reaction, gold investors bought the yellow metal immediately after the announcement. Gold prices had eased in recent weeks as the market priced in expectations of the small rate hike.

Spot gold surged from around $1,200 an ounce to the $1,219 an ounce level immediately after the Fed announcement.

Wednesday’s news is net bullish for the gold market as the Federal Reserve maintained its interest rate projections at only three rate hikes in 2017. The Federal Reserve, led by Fed Chair Janet Yellen, remains in a cautious “show me” mode and today’s announcement failed to reveal intentions to raise rates at a faster pace than previously expected.

In related markets, stocks extended gains, while bond yields and the dollar fell after the Fed’s announcement. Stocks are still fueled by historically low levels of monetary policy, which has artificially created demand for equities as income-seeking investors are forced to take on more risk. The stock market is overvalued by a number of historical measures and has officially hit the nose-bleed section.

Inflation and European Elections Drive Gold Higher

The Federal Reserve’s tepid approach to raising interest rates unleashed strong demand for gold as many other drivers are supporting diversification into precious metals.

U.S. inflation numbers hit a 5-year high this week, with the annual CPI inflation rate at 2.7%. Gold traditionally outperforms during inflationary periods and the macroeconomic stage is set for a continued rise in inflation.

Smart money players are focused on Wednesday’s election in Netherlands. Uncertainty over the rise of a strong populist movement in Europe has boosted gold prices this year. A wave of populist parties are advocating protectionist policies, which would be gold-bullish if enacted. Traders will be monitoring the Dutch election results over the next several hours as a litmus test for the rest of Europe.

Current Levels Offer Excellent Buy Spot

The current levels in gold offers an excellent buying opportunity. Spot gold is well off the $1,365 per ounce level hit last summer. Current levels in gold could likely be the lowest price points for buyers in 2017.

Today, the U.S. economy is linked to the global economy. Many are asking what factors will drive long-term growth. Economists and financiers believe the answer is emerging markets. “Two-thirds of the world’s GDP growth is going to come from these markets in the course of the next 10, 12 years,” remarked Arif Naqvi at the recent World Economic Forum in Davos, Switzerland. He is the founder and CEO of private equity strategy firm The Abraaj Group. His comments reflect the sentiment of many who are looking to countries like India for clues on global growth.

However, to understand the vitality of such countries one must look deeper into the commodities trade. Commodity price trends are critical to “many emerging-market countries that rely on commodity exports, such as Russia, South Africa and Malaysia,” according to The Wall Street Journal. Therefore, there is a transitive effect in play; rising commodities help emerging-market countries and subsequently, these same countries will spur global growth. Let’s take a closer look at how this connection may play out.

Digging Deeper

A symbiotic relationship is forming between these countries and gold miners. The countries need growth in the sector to support local economies. At the same time, miners need these territories. According to an executive with Randgold Resources Ltd., “The industry has since 2000 been mining gold at a faster rate than it finds new reserves and must intensify exploration and development in emerging markets to address supply problems.”

Today, it’s unclear to what extent this interconnectedness is evident to both parties. The unassailable fact remains that miner production is likely to falter without extending its reach into these economies. Reports from the Thomas Reuters 2016 Gold Survey indicate that “There are relatively few new projects and expansions expected to begin producing this year, and those in the near-term pipeline are generally fairly modest in scale.” The bottom line: “Global mine supply is set to continue a multi-year downtrend in 2017.”

Bringing Opportunity to The Surface

Emerging markets are the answer. Miners exploring opportunities in these countries will likely discover resources while fueling the engine of global economic growth. Meanwhile, investors have issued a clear vote of confidence in gold. This trading activity may be the shot in the arm miners need to take the next step. Confidence, more than anything else, will reinvigorate production. The companies need to deploy their equipment and capital in the regions promising both return and increased trade.

Speaking of mining capabilities, Egizio Bianchini, the co-head of BMO’s global metals and mining practice, remarked that “there is “a lot of money still wanting to be deployed in this sector.” Investors are betting that miners will wake up to this reality. The surge of commodity futures in recent months reflect a broad sentiment that the new U.S. administration will deliver on promises.

Interestingly, Trump’s agenda may be secondary to the importance of what happens abroad. In the years ahead we’re likely to see the effects of globalism unfold regardless of political change. Deposits below ground don’t care who is the ruling party. At the end of the day the market drives change.